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Thursday, February 28, 2008

Assorted on India

There is a germ of truth in criticism of the current financial crises in the US and UK. But it is obscured by layers of exaggeration and misrepresentation to make the point that 'sophisticated' financial markets are inherently dangerous, and to imply that India has avoided a similar fate by opting for primitivism instead. These outrageous portrayals by critics of reform opportunistically assailing �market fundamentalism� for the problems it creates through episodic market failures run the risk of throwing the baby out with the bath water. If heeded, propagandists for the Indian middle-path, who are genetically inclined toward advocating heterodox intermediate regimes, risk doing serious damage to India and its financial system.

What has happened as a result of unsustainable policies (simultaneous budget and current account deficits, and loose monetary and fiscal policies) in the US is that a huge liquidity bubble of $7-10 trillion has caused massive inflation in global prices for all asset classes: property, stocks, commodities, etc. The process of unwinding has now begun, with large declines in valuations of US property. How will unwinding proceed in other asset markets and especially emerging markets like India�s? That is a question that we will be preoccupied with as 2008 unfolds. But it should not be a question that deflects us from the urgency of continued financial reform. India needs to take its rightful place quickly in the world of financial service exports. It can provide financial services more efficiently than most other countries. It would be a waste of talent and opportunity not to exploit that comparative/competitive advantage.

But, to do so, India must have an open capital account, with capable and efficient markets, world-class institutions and responsive regulators, not overbearing ones wedded to antediluvian modes of command-and-control, without making the effort to be more modern about risk management, and thus more inclined toward intelligent and subtle interventions. State ownership in countries like India (which is not Singapore) is inherently and structurally unconducive to efficiency, innovation, competitiveness, or probity. For that reason it needs to withdraw from finance. Keeping all this in mind, the agenda for continued reform is large and complex; nothing should be permitted to deflect us from the goal of achieving it � certainly not obdurate and obtuse analysis of what the 2007 crisis does and does not teach us!